As a banker between pledge & hypothecation, which one you will prefer? Justify in favor of your argument

 Hypothecation is a form of security in which the borrower offers assets owned by him like stocks, bonds, other movable assets as collateral security for loan without transferring title to the lender.

However, the lender gets a right to sell the property in the event of default made by the                                                                                                     borrower. Pledge is also a form of security to assure that a person will repay a debt under contract.

In Pledge borrower temporarily gives possession of the property to the lender that also gets a right to sell the property in the case of default the loan.

 If  disbursement of loan is done without considering the honesty of debtor, past experience, education, business skill etc. the loan will be bad in classification. So between pledge and hypothecation which one is better depend on the advantages and disadvantages of them. Advantage and disadvantages of pledge and hypothecation are discussed below---

Pledge-when loan debtor deposit his goods to the investor as a guarantee for repay of loan and investor has the possession of the goods then it is called pledge.

 

1.Advantages

* in case of a default, the pledgee has the right to sell the goods in his possession and adjust its proceeds towards the amount due with a single notice.

* as The pledgee retains the possession of the goods pledger cannot sell or pledge to another pledge.

 

2. Disadvantages

*need appoint of extra manpower for security of pledge goods.

*need more inspection so that cannot sell or destroy the goods

*perishable goods are not applicable for pledge loan

*raw materials for industry and products for packing is not applicable for pledge loan.

Hypothecation- when loan debtor has the possession of the goods but  ownership is to the investor as a guarantee for repay of loan then it is called hypothecation. .

 

1.Advantages

*collateral security is mandatory for which if loan is default in can recover by selling security.

*no need for extra expense for appointment of security for safety of goods.

*no need extra inspection

2. Disadvantages

 *need approval from court for auction of goods/collateral security

*debtor can sell the goods without concern of investor.

From the above discussion we can say that, from theoretical view though pledge is suitable but it is un-useful in nature. Its past experience is not also good. So use of pledge loan is decreasing day by day. Other side, use of hypothecation is increasing day by day because of its less inspection of goods and has collateral security for loan default. For this reason banks usually prefer hypothecation than pledge.